This sample document is the work product of a coalition of attorneys who specialize in venture capital financings, working under the auspices of the NVCA. See the NVCA website for a list of the Working Group members. This document is intended to serve as a starting point only, and should be tailored to meet your specific requirements. This document should not be construed as legal advice for any particular facts or circumstances. Note that this sample presents an array of (often mutually exclusive) options with respect to particular deal provisions.TERM SHEETPreliminary NotesThis Term Sheet maps to the NVCA model documents, and for convenience the provisions are grouped according to the particular model document in which they may be found. Although this Term Sheet is perhaps somewhat longer than a "typical" VC Term Sheet, the aim is to provide a level of detail that makes the Term Sheet useful as both a road map for the document drafters and as a reference source for the business people to quickly find deal terms without the necessity of having to consult the legal documents (assuming of course there have been no changes to the material deal terms prior to execution of the final documents).TERM SHEETFOR SERIES A PREFERRED STOCK FINANCING OF[INSERT COMPANY NAME], INC.[ __, 200_]This Term Sheet summarizes the principal terms of the Series A Preferred Stock Financing of [___________], Inc., a [Delaware] corporation (the “Company”). In consideration of the time and expense devoted and to be devoted by the Investors with respect to this investment, the No Shop/Confidentiality and Counsel and Expenses provisions of this Term Sheet shall be binding obligations of the Company whether or not the financing is consummated. No other legally binding obligations will be created until definitive agreements are executed and delivered by all parties. This Term Sheet is not a commitment to invest, and is conditioned on the completion of due diligence, legal review and documentation that is satisfactory to the Investors. This Term Sheet shall be governed in all respects by the laws of the [State of Delaware].Offering TermsClosing Date: As soon as practicable following the Company’sacceptance of this Term Sheet and satisfaction of theConditions to Closing (the “Closing”). [provide formultiple closings if applicable]Investors: Investor No. 1: [_______] shares ([__]%), $[_________]Investor No. 2: [_______] shares ([__]%), $[_________][as well other investors mutually agreed upon byInvestors and the Company]Amount Raised: $[________], [including $[________] from the conversionof principal [and interest] on bridge notes].1Price Per Share: $[________] per share (based on the capitalization ofthe Company set forth below) (the “Original PurchasePrice”).1Modify this provision to account for staged investments or investments dependent on the achievement of milestones by the Company.Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted pre-money valuation of $[_____] and afully-diluted post-money valuation of $[______](including an employee pool representing [__]% of thefully-diluted post-money capitalization).Capitalization: The Company’s capital structure before and after theClosing is set forth below:Pre-Financing Post-Financing Security # of Shares % # of Shares % Common – FoundersCommon – Employee StockPoolIssuedUnissued[Common – Warrants]Series A PreferredTotalCHARTER2Dividends: [Alternative 1: Dividends will be paid on the Series APreferred on an as-converted basis when, as, and ifpaid on the Common Stock][Alternative 2: Non-cumulative dividends will be paidon the Series A Preferred in an amount equal to$[_____] per share of Series A Preferred when and ifdeclared by the Board.]2The Charter is a public document, filed with the [Delaware] Secretary of State, that establishes all of the rights, preferences, privileges and restrictions of the Preferred Stock. Note that if the Preferred Stock does not have rights, preferences, and privileges materially superior to the Common Stock, then (after Closing) the Company cannot defensibly grant Common Stock options priced at a discount to the Preferred Stock.[Alternative 3: The Series A Preferred will carry anannual [__]% cumulative dividend [compounded annually],payable upon a liquidation or redemption. For anyother dividends or distributions, participation withCommon Stock on an as-converted basis.] 3Liquidation Preference: In the event of any liquidation, dissolution or windingup of the Company, the proceeds shall be paid asfollows:[Alternative 1 (non-participating Preferred Stock):First pay [one] times the Original Purchase Price [plusaccrued dividends] [plus declared and unpaid dividends]on each share of Series A Preferred. The balance ofany proceeds shall be distributed to holders of CommonStock.][Alternative 2 (full participating Preferred Stock):First pay [one] times the Original Purchase Price [plusaccrued dividends] [plus declared and unpaid dividends]on each share of Series A Preferred. Thereafter, theSeries A Preferred participates with the Common Stockon an as-converted basis.][Alternative 3 (cap on Preferred Stock participationrights): First pay [one] times the Original PurchasePrice [plus accrued dividends] [plus declared andunpaid dividends] on each share of Series APreferred. Thereafter, Series A Preferredparticipates with Common Stock on an as-converted basisuntil the holders of Series A Preferred receive anaggregate of[_____] times the Original PurchasePrice.]A merger or consolidation (other than one in whichstockholders of the Company own a majority by voting3In some cases, accrued and unpaid dividends are payable on conversion as well as upon a liquidation event. Most typically, however, dividends are not paid if the preferred is converted. Another alternative is to give the Company the option to pay accrued and unpaid dividends in cash or in common shares valued at fair market value. Thelatter are referred to as “PIK” (payment-in-kind) dividends.power of the outstanding shares of the surviving oracquiring corporation) and a sale, lease, transfer orother disposition of all or substantially all of theassets of the Company will be treated as a liquidationevent (a “Deemed Liquidation Event”), therebytriggering payment of the liquidation preferencesdescribed above [unless the holders of [___]% of theSeries A Preferred elect otherwise].Voting Rights: The Series A Preferred Stock shall vote together withthe Common Stock on an as-converted basis, and not as aseparate class, except (i) the Series A Preferred as aclass shall be entitled to elect [_______] [(_)]members of the Board (the “Series A Directors”), (ii)as provided under “Protective Provisions” below or(iii) as required by law. The Company’s Certificateof Incorporation will provide that the number ofauthorized shares of Common Stock may be increased ordecreased with the approval of a majority of thePreferred and Common Stock, voting together as a singleclass, and without a separate class vote by the CommonStock.4Protective Provisions: So long as[insert fixed number, or %, or “any”]shares of Series A Preferred are outstanding, theCompany will not, without the written consent of theholders of at least [__]% of the Company’s Series APreferred, either directly or by amendment, merger,consolidation, or otherwise:(i) liquidate, dissolve or wind-up the affairs ofthe Company, or effect any Deemed Liquidation Event;(ii) amend, alter, or repeal any provision of theCertificate of Incorporation or Bylaws [in a manneradverse to the Series A Preferred];5 (iii) createor authorize the creation of or issue any other 4For California corporations, one cannot “opt out” of the statutory requirement of a s eparate class vote by Common Stockholders to authorize shares of Common Stock.5Note that as a matter of background law, Section 242(b)(2) of the Delaware General Corporation Law provides that if any proposed charter amendment would adversely alter the rights, preferences and powers of one seriesof Preferred Stock, but not similarly adversely alter the entire class of all Preferred Stock, then the holders of that seriesare entitled to a separate series vote on the amendment.security convertible into or exercisable for anyequity security, having rights, preferences orprivileges senior to or on parity with the Series APreferred, or increase the authorized number ofshares of Series A Preferred; (iv) purchase orredeem or pay any dividend on any capital stockprior to the Series A Preferred, [other than stockrepurchased from former employees or consultants inconnection with the cessation of theiremployment/services, at the lower of fair marketvalue or cost;] [other than as approved by theBoard, including the approval of [_____] Series ADirector(s)]; or (v) create or authorize thecreation of any debt security [if the Company’saggregate indebtedness would exceed $[____][otherthan equipment leases or bank lines of credit][otherthan debt with no equity feature][unless such debtsecurity has received the prior approval of theBoard of Directors, including the approval of[________] Series A Director(s)]; (vi) increase ordecrease the size of the Board of Directors.Optional Conversion: The Series A Preferred initially converts 1:1 to CommonStock at any time at option of holder, subject toadjustments for stock dividends, splits, combinationsand similar events and as described below under “Anti-dilution Provisions.”Anti-dilution Provisions: In the event that the Company issues additionalsecurities at a purchase price less than the currentSeries A Preferred conversion price, such conversionprice shall be adjusted in accordance with thefollowing formula:[Alternative 1: “Typical” weighted average:CP2 = CP1* (A+B) / (A+C)CP2= New Series A Conversion PriceCP1= Series A Conversion Price in effect immediately prior to new issueA = Number of shares of Common Stock deemed tobe outstanding immediately prior to newissue (includes all shares of outstandingcommon stock, all shares of outstandingpreferred stock on an as-converted basis,and all outstanding options on an as-exercised basis; and does not include anyconvertible securities converting intothis round of financing)B = Aggregate consideration received by theCorporation with respect to the new issuedivided by CP1C = Number of shares of stock issued in thesubject transaction][Alternative 2: Full-ratchet – the conversion pricewill be reduced to the price at which the new sharesare issued.][Alternative 3: No price-based anti-dilutionprotection.]The following issuances shall not trigger anti-dilutionadjustment:6(i) securities issuable upon conversion of any ofthe Series A Preferred, or as a dividend ordistribution on the Series A Preferred;(ii) securities issued upon the conversion of anydebenture, warrant, option, or other convertiblesecurity; (iii) Common Stock issuable upon a stocksplit, stock dividend, or any subdivision of sharesof Common Stock; and (iv) shares of Common Stock(or options to purchase such shares of Common Stock)issued or issuable to employees or directors of, orconsultants to, the Company pursuant to any planapproved by the Company’s Board of Directors[including at least [_______] Series A Director(s)][(v) shares of Common Stock issued or issuable tobanks, equipment lessors pursuant to a debt6Note that additional exclusions are frequently negotiated, such as issuances in connection with equipment leasing and commercial borrowing.financing, equipment leasing or real propertyleasing transaction approved by the Board ofDirectors of the Corporation [, including at least[_______] Series A Director(s)].Mandatory Conversion: Each share of Series A Preferred will automatically beconverted into Common Stock at the then applicableconversion rate in the event of the closing of a [firmcommitment] underwritten public offering with a priceof [___]times the Original Purchase Price (subject toadjustments for stock dividends, splits, combinationsand similar events) and [net/gross] proceeds to theCompany of not less than $[_______] (a “QPO”), or(ii) upon the written consent of the holders of [__]%of the Series A Preferred.7[Pay-to-Play: [Unless the holders of [__]% of the Series A electotherwise,] on any subsequent down round all [Major]Investors are required to participate to the fullextent of their participation rights (as describedbelow under “Investor Rights Agreement –Right toParticipate Pro Rata in Future Rounds”), unless theparticipation requirement is waived for all [Major]Investors by the Board [(including vote of [a majorityof] the Series A Director[s])]. All shares of Series APreferred8 of any [Major] Investor failing to do sowill automatically [lose anti-dilution rights] [loseright to participate in future rounds] [convert toCommon Stock and lose the right to a Board seat ifapplicable].97The per share test ensures that the investor achieves a significant return on investment before the Company can go public. Also consider allowing a non-QPO to become a QPO if an adjustment is made to the Conversion Price for the benefit of the investor, so that the investor does not have the power to block a public offering.8Alternatively, this provision could apply on a proportionate basis (e.g., if Investor plays for ½ of pro rata share, receives ½ of anti-dilution adjustment).9If the punishment for failure to participate is losing some but not all rights of the Preferred (e.g., anything other than a forced conversion to common), the Charter will need to have so-called “blank check preferred” provisionsat least to the extent necessary to enable the Board to issue a “shadow” class of preferred with diminished rights in the event an investor fails to participate. Note that as a drafting matter it is far easier to simply have (some or all of) the preferred convert to common.Redemption Rights:10The Series A Preferred shall be redeemable from fundslegally available for distribution at the option ofholders of at least[__]% of the Series A Preferredcommencing any time after the fifth anniversary of theClosing at a price equal to the Original Purchase Price[plus all accrued but unpaid dividends]. Redemptionshall occur in three equal annual portions. Upon aredemption request from the holders of the requiredpercentage of the Series A Preferred, all Series APreferred shares shall be redeemed [(except for anySeries A holders who affirmatively opt-out)].11STOCK PURCHASE AGREEMENTRepresentations and Warranties: Standard representations and warranties by the Company. [Representations and warranties by Founders regarding [technology ownership, etc.].12Conditions to Closing: Standard conditions to Closing, which shall include,among other things, satisfactory completion offinancial and legal due diligence, qualification of theshares under applicable Blue Sky laws, the filing of aCertificate of Incorporation establishing the rightsand preferences of the Series A Preferred, and anopinion of counsel to the Company.Counsel and Expenses: [Investor/Company] counsel to draft closing documents.Company to pay all legal and administrative costs of10Redemption rights allow Investors to force the Company to redeem their shares at cost [plus a small guaranteed rate of return (e.g., dividends)]. In practice, redemption rights are not often used; however, they do providea form of exit and some possible leverage over the Company. While it is possible that the right to receive dividends on redemption could give rise to a Code Section 305 “deemed dividend” proble m, many tax practitioners take the view thatif the liquidation preference provisions in the Charter are drafted to provide that, on conversion, the holder receives the greater of its liquidation preference or its as-converted amount (as provided in the NVCA model Certificate of Incorporation), then there is no Section 305 issue.11Due to statutory restrictions, it is unlikely that the Company will be legally permitted to redeem in thevery circumstances where investors most want it (the so-called “sideways situation”), investors will sometimes requestthat certain penalty provisions take effect where redemption has been requested but the Company’s available cash flowdoes not permit such redemption - - e.g., the redemption amount shall be paid in the form of a one-year note to each unredeemed holder of Series A Preferred, and the holders of a majority of the Series A Preferred shall be entitled toelect a majority of the Company’s Board of Directors until such amounts are paid in full.12Note that while it is not at all uncommon in east coast deals to require the Founders to personally rep and warrant (at least as to certain key matters, and usually only in the Series A round), such Founders reps are rarely foundin west coast deals.the financing [at Closing], including reasonable fees(not to exceed $[_____])and expenses of Investorcounsel[, unless the transaction is not completedbecause the Investors withdraw their commitment withoutcause]13.Company Counsel: []Investor Counsel: []INVESTOR RIGHTS AGREEMENTRegistration Rights:Registrable Securities: All shares of Common Stock issuable upon conversion ofthe Series A Preferred and [any other Common Stock heldby the Investors] will be deemed “RegistrableSecurities.”14Demand Registration: Upon earliest of (i) [three-five] years after theClosing; or (ii) [six] months following an initialpublic offering (“IPO”), persons holding [__]% of theRegistrable Securities may request [one][two](consummated) registrations by the Company of theirshares. The aggregate offering price for suchregistration may not be less than $[5-10] million. Aregistration will count for this purpose only if (i)all Registrable Securities requested to be registeredare registered and (ii) it is closed, or withdrawn atthe request of the Investors (other than as a result ofa material adverse change to the Company).Registration on Form S-3: The holders of [10-30]% of the Registrable Securities will have the right to require the Company to register on Form S-3, if available for use by the Company,13The bracketed text should be deleted if this section is not designated in the introductory paragraph as one of the sections that is binding upon the Company regardless of whether the financing is consummated.14Note that Founders/management sometimes also seek registration rights.Registrable Securities for an aggregate offering priceof at least $[1-5 million]. There will be no limit onthe aggregate number of such Form S-3 registrations,provided that there are no more than [two] per year.Piggyback Registration: The holders of Registrable Securities will be entitledto “piggyback” registration rights on allregistration statements of the Company, subject to theright, however, of the Company and its underwriters toreduce the number of shares proposed to be registeredto a minimum of [30]% on a pro rata basis and tocomplete reduction on an IPO at the underwriter’sdiscretion. In all events, the shares to be registeredby holders of Registrable Securities will be reducedonly after all other stockholders’ shares are reduced.Expenses: The registration expenses (exclusive of stock transfertaxes, underwriting discounts and commissions will beborne by the Company. The Company will also pay thereasonable fees and expenses[, not to exceed $______,]of one special counsel to represent all theparticipating stockholders.Lock-up: Investors shall agree in connection with the IPO, ifrequested by the managing underwriter, not to sell ortransfer any shares of Common Stock of the Company[(excluding shares acquired in or following the IPO)]for a period of up to 180 days following the IPO(provided all directors and officers of the Company and[1 –5]% stockholders agree to the same lock-up).Such lock-up agreement shall provide that anydiscretionary waiver or termination of the restrictionsof such agreements by the Company or representatives ofthe underwriters shall apply to [Major] Investors, prorata, based on the number of shares held. A “MajorInvestor” means any Investor who purchases at least$[______] of Series A Preferred.Termination: Earlier of [5] years after IPO, upon a DeemedLiquidation Event, or when all shares of an Investorare eligible to be sold without restriction under Rule144(k) within any 90-day period.No future registration rights may be granted without consent of the holders of a[majority] of the Registrable Securities unless subordinate to the Investor’s rights.Management and Information Rights: A Management Rights letter from the Company, in a form reasonably acceptable to the Investors, will be delivered prior to Closing to each Investor that requests one. 15Any Major Investor [(who is not a competitor)] will be granted access to Company facilities and personnel during normal business hours and with reasonable advance notification. The Company will deliver to such Major Investor (i) annual, quarterly, [and monthly] financial statements, and other information as determined by the Board; (ii) thirty days prior to the end of each fiscal year, a comprehensive operating budget forecasting the Company’s revenues, expenses, and cash position on a month-to-month basis for the upcoming fiscal year; and (iii) promptly following the end of each quarter an up-to-date capitalization table, certified by the CFO.Right to Participate Pro Rata in Future Rounds: All [Major] Investors shall have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of all outstanding Preferred Stock into Common Stock and the exercise of all options outstanding under the Company’s stock plans), to participate in subsequent issuances of equity securities of the Company (excluding those issuances lis ted at the end of the “Anti-dilution Provisions” section of this Term Sheet and issuances in connection with acquisitions by the Company). In addition, should any [Major] Investor choose not to purchase its full pro rata share, the remaining [Major] Investors shall have the right to purchase the15See commentary in introduction to NVCA model Managements Rights Letter, explaining purpose of such letter.remaining pro rata shares.Matters Requiring Investor Director Approval: [So long as [__]% of the originally issued Series A Preferred remains outstanding]the Company will not, without Board approval, which approval must include the affirmative vote of [____] of the Series A Director(s):(i) make any loan or advance to, or own any stockor other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company; (ii) make any loan or advance to any person, including, any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of a employee stock or option plan approved by the Board of Directors; (iii) guarantee, any indebtedness except for trade accounts of the Company or any subsidiary arising in the ordinary course of business; (iv) make any investment other than investments in prime commercial paper, money market funds, certificates of deposit in any United States bank having a net worth in excess of $100,000,000 or obligations issued or guaranteed by the United States of America, in each case having a maturity not in excess of [two years]; (v) incur any aggregate indebtedness in excess of $[_____] that is not already included in a Board-approved budget, other than trade credit incurred in the ordinary course of business; (vi) enter into or bea party to any transaction with any director,officer or employee of the Company or any “associate” (as defin ed in Rule 12b-2 promulgated under the Exchange Act) of any such person [except transactions resulting in payments to or by the Company in an amount less than $[60,000] per year], [or transactions made in the ordinary course of business and pursuant to reasonable requirements of the Company’s business and upon fair and reasonable terms that are approved by a majority of the Boardof Directors];16 (vii) hire, fire, or change the compensation of the executive officers, including approving any option plans; (viii) change the principal business of the Company, enter new lines of business, or exit the current line of business; or (ix) sell, transfer, license, pledge or encumber technology or intellectual property, other than licenses granted in the ordinary course of business.Non-Competition and Non-Solicitation and Agreements:17Each Founder and key employee will enter into a [one] year non-competition and non-solicitation agreement in a form reasonably acceptable to the Investors.Non-Disclosure and Developments Agreement: Each current and former Founder, employee and consultant with access to Company confidential information/trade secrets will enter into a non-disclosure and proprietary rights assignment agreement in a form reasonably acceptable to the Investors.Board Matters:Each Board Committee shall include at least one SeriesA Director.The Board of Directors shall meet at least[monthly][quarterly], unless otherwise agreed by a voteof the majority of Directors.The Company will bind D&O insurance with a carrier andin an amount satisfactory to the Board of Directors.In the event the Company merges with another entity andis not the surviving corporation, or transfers all ofits assets, proper provisions shall be made so thatsuccessors of the Com pany assume Company’s obligations16Note that Section 402 of the Sarbanes-Oxley Act of 2003 would require repayment of any loans in fullprior to the Company filing a registration statement for an IPO.17Note that non-compete restrictions (other than in connection with the sale of a business) are prohibited in California, and may not be enforceable in other jurisdictions, as well. In addition, some investors do not require such agreements for fear that employees will request additional consideration in exchange for signing a Non-Compete/Non-Solicit (and indeed the agreement may arguably be invalid absent such additional consideration - - although having an employee sign a non-compete contemporaneous with hiring constitutes adequate consideration). Others take the viewthat it should be up to the Board on a case-by-case basis to determine whether any particular key employee is requiredto sign such an agreement. Non-competes typically have a one year duration, although state law may permit up to two years.with respect to indemnification of Directors.Employee Stock Options: All employee options to vest as follows: [25% afterone year, with remaining vesting monthly over next 36months].[Immediately prior to the Series A Preferred Stockinvestment, [______] shares will be added to the optionpool creating an unallocated option pool of [_______]shares.]Key Person Insurance: Company to acquire life insurance on Founders [nameeach Founder] in an amount satisfactory to the Board.Proceeds payable to the Company.[IPO Directed Shares:18To the extent permitted by applicable law and SECpolicy, upon an IPO consummated one year after Closing,Company to use reasonable best efforts to causeunderwriters to designate [10]% of the offering asdirected shares, 50% of which shall be allocated byMajor Investors.][QSB Stock: Company shall use reasonable best efforts to cause itscapital stock to constitute Qualified Small BusinessStock unless the Board determines that suchqualification is inconsistent with the best interestsof the Company.]Termination: All rights under the Investor Rights Agreement, otherthan registration rights, shall terminate upon theearlier of an IPO, a Deemed Liquidation Event or atransfer of more than 50% of Company’s voting power.RIGHT OF FIRST REFUSAL/CO-SALE AGREEMENTAND VOTING AGREEMENTRight of first Refusal/ Company first and Investors second (to the extent18SEC Staff examiners have taken position that, if contractual right to friends and family shares was granted less than 12 months prior to filing of registration statement, this will be considered an “offer” made prematurely before filing of IPO prospectus. So, investors need to agree to drop shares from offering if that would hold up the IPO. While some documents provide for alternative parallel private placement where the IPO does occur within 12 months,such a parallel private placement could raise integration issues and negatively impact the IPO. Hence, such an alternative is not provided for here.。
